Asset Allocation – YOU And YOUR MONEY®http://money.ca/you_and_your_money
Canadian financial writers on personal finance.Thu, 08 Dec 2016 06:30:53 +0000en-UShourly1https://wordpress.org/?v=4.5.4Passive Income and Stockbroking: A Mini Guidehttp://money.ca/you_and_your_money/2016/09/06/passive-income-and-stockbroking-a-mini-guide/
Tue, 06 Sep 2016 13:55:27 +0000http://money.ca/you_and_your_money/?p=5989Invest wisely, work smart and spend less. These are the three basic strategies behind building any type of passive income through stockbroking. If these principles are as simple as they sound, why are so many investors failing to turn a profit and build sustainable wealth over time? The truth of the matter is that developing a passive investment strategy can be a bit complicated. While the basic concepts are clear, their implementation may prove to be a bit more of a challenge. It is therefore prudent to take a look at some tips and tricks that will help to leverage the advantages of this approach.

Solid (Digital) Foundation

You may believe that you have developed the best trading strategy. Without being provided with access to the latest investment tools, your approach would still be fruitless. It is therefore crucial to adopt only the most advanced stockbroking platform. Dynamic trading software, numerous technical indicators, concise charting capabilities and mobile-friendly architecture are only a few of the tools which should always be at the disposal of the trader. Thus, it will be much easier to manage an account on a day-to-day basis.

Which Stocks to Choose?

This is one of the most common and most elusive questions. The ultimate choice will depend upon the expertise and comfort levels of the trader. Yet, there are several guidelines which are specifically designed to cater to a passive income strategy. Some of the main hints to keep in mind are:

Maintain a robust base with blue-chip equities.

Diversify into multiple sectors for greater stability.

Allocate a portion of the portfolio to longer-term assets such as properties and commodities.

Diversification will mean little without stability. This approach is one of the best ways to successfully manage both.

A Moderate Level of Risk

One of the most common mistakes is for a trader to believe that risk must be entirely avoided within a passive approach to stockbroking. Risk should not be eliminated, but rather mitigated and managed correctly. This is the primary reason why even conservative investors tend to dabble in more liquid positions such as binary trades and the Forex markets. However, a good rule of thumb is to never let the value of these positions exceed more than ten per cent of the entire portfolio.

The Psychology Behind Earning a Passive Income

According to The Glimpse, Psychology will play an important role behind this strategy. By the very nature of passive wealth management, the stock trader should set his or her gaze on the long-term financial horizon as opposed to becoming too preoccupied with short-term gains (or losses). It is wise to set quarterly benchmarks and analyse whether or not these can be met. Should expectations fall short, it could be a good idea to closely examine technical and fundamental trading methods. This is also the best way to avoid emotion influencing a snap decision one way or the other.

As we may be entering into unknown financial waters, embracing a passive stockbroking investment strategy now could be the most productive way to secure wealth into the foreseeable future.

]]>Being an Investor Isn’t Easy. Here Are Some Tips from BenefitGuardhttp://money.ca/you_and_your_money/2016/07/22/being-an-investor-isnt-easy-here-are-some-tips-from-benefitguard/
Fri, 22 Jul 2016 19:33:19 +0000http://money.ca/you_and_your_money/?p=5960Everyone agrees that the stock market is expensive, it takes too long to recover from the recession, and central banks seem to have hit their limits regarding their ability to boost growth.

There is no market Armageddon on the horizon, of course, but it’s far from “get rich fast” either. The rumor circulating on Wall Street is that stock and bond returns will be lousy for years to come. This won’t result in you losing money, but the usual 7 to 8 percent return on stocks, or 3.6 percent on bonds, is a thing of the past –at least that’s what investment firm Bernstein thinks. Thins don’t look any different for private equity returns either.

This environment leaves you with three basic options. Your actions will depend on the level of risk you are willing to take.

Stay put. Boring is not that bad. It may not sound too sexy, but for many people, the best choice at this time is to remain invested and keep your portfolio as diverse as possible.
“You should be aiming for a boring portfolio at this time,” says Kate Warne, Edward Jones’s chief investment strategist.

Rebalancing soon is Jones’s best advice. If you haven’t taken a look at your portfolio for a long time, you should better give a call to your 401(k) provider or financial advisor and ensure that your diversification is on the right level.

For many younger investors, their portfolio mix is about 80 percent stocks and 20 percent bonds. Investors of higher maturity are probably looking at something like 60 percent stocks and 40 percent bonds. The problem is the stock market’s huge run-up during the 2009-2014 period, resulting in many people having more in stocks that they even know about. Don’t allow yourself to be caught unprepared; make sure you rebalance if you have to.

Look at a 401(k) plan. Most 401(k) providers will help you with fiduciary work but won’t take on any of the fiduciary risk for you. This is a growing concern for executives and HR Managers because of an increasing wave of employee lawsuits and scrutiny by the IRS and Department of Labor. BenefitGuard is truly different.

They believe that the service providers doing the fiduciary work on a 401(k) plan should be taking on the risks, not you. And we’re not talking about being a co-fiduciary.

Unlike any other provider in the industry, they appoint professional fiduciaries to sign and act in the administrative and investment fiduciary roles for you. They will sign and act as your 3(16) plan administrator, 3(21) named fiduciary, and 3(38) investment manager. They also hold a one Million dollar bond on each and every plan.

With BenefitGuard, there’s no more signing your name on documents you don’t have time to review, and might not understand. And when the IRS and Department Of Labor come knocking, they’ll handle it for you.

Reduce your expenses. Companies adopt this strategy very often. When growth is at a stall, they concentrate on reducing their costs. This way they maintain their “bottom line” virtually unchanged. Investors can also follow this tactic by aggressively going after fee reductions.

There has been and overhaul of inexpensive index funds and mutual funds. Almost every provider is pressured to reduce their fees. Fidelity recently announced that they are lowering their fees for 27 funds. And you now have Robinhood, which is an app that offers trading without fees, a great difference from the standard $9.99 fee that brokers usually charge for stock transactions.

You can make considerable savings by cutting down on the fees you pay. If you don’t know the fees, you are currently paying, you can go to FeeX, a new website that will estimate them for you and propose a course of action toward reducing them.

“Usually, people can cut down their fees by about 85 percent” stated Yoav Zurel, co-founder, and CEO of FeeX.

The take home message according to Masters, investment strategist at Bernstein, is to go for higher diversification when things are uncertain, not lower. “Equip yourself with more than one ways to emerge as a winner.”

As its name implies, in its simplest terms, it means efficiently managing a company’s supply chain, which traditionally consists of three components: customers, a producer, and the producer’s suppliers.

However, many people forget about extended supply chains, which often include a number of additional entities, including the customers’ customers, as well as the suppliers’ suppliers. These subsidiary relationships are just as important as primary ones because they affect the supply and distribution of products.

For example, if you own a shoe company and your customers (shoe stores) lose customers due to street construction or store closure, this affects the number of orders they will place with your company for new merchandise. Reversely, if one your suppliers’ suppliers suffers from a plant closure or logistical issue that affects your business’ ability to manufacture product.

While most supply chain managers only control the immediate chain, they are ultimately responsible for the integrity and efficiency of the entire supply chain.

The art of supply chain management entails three key steps: purchasing, production and fulfilment. Supply chain managers oversee and work to optimize the processes of acquiring inputs from suppliers (purchasing), converting those inputs into a finished product (production), and delivering those products to customers (fulfillment).

In order to manage the extended chain, supply chain managers must ensure the locations where manufacturing and distribution facilities are located are accessible and in politically stable jurisdictions.They must also decide how to organize which goods and materials go to which facilities and from which parts of the world to source the inputs.

Supply chain management is fundamental to a company’s viability.From my experience, I have seen first-hand clients heavily investing in integrating the latest technology into their supply chain in order to promote efficiency and sustainability.

As the world becomes more globalized, the role of the supply chain management has become even more important, especially for companies that source goods and raw materials from around the world. To help ease some of the confusion caused by the vastness of an multinational supply chain, many managers are utilizing a robust array of software to help track, log and monitor each link in the supply chain.

In fact, according to theWall Street Journal, “The market for supply-chain management software grew 11% to $11.1 billion in 2015, on a constant-currency basis, and is estimated to grow to $17.6 billion by 2020.”

Growth in the cloud computing sector has also ushered in a new age of supply chain management that offers better control of logistics and transportation. Monitors on trucks connected to the Internet of Things can notify managers of shipment distributions and transport issues in real time giving managers time to look for alternate solutions.

As the old adage says, you are only as strong as your weakest link — it is the supply chain manager’s job to make sure no links are weak or compromised.

]]>What’s Asset Protection Insurance (“API™”)http://money.ca/you_and_your_money/2016/03/04/jeffrey-lipton-fairmont-gloucester-whats-asset-protection-insurance-api/
Fri, 04 Mar 2016 18:15:31 +0000http://money.ca/you_and_your_money/?p=5682While many are versed on home insurance, life insurance, car insurance and health insurance, few people know about the importance ofAsset Protection Insurance (API™). Asset Protection Insurance protects and safeguards assets from a variety of threats including litigation and creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets, while operating within the bounds of debtor-creditor law.

API™ is a completely legal strategy.However, experts warn effective asset protection begins before a claim or liability occurs, since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing and family limited partnerships.

In addition to protection, Asset Protection insurance is meant to bridge the gap in coverage between your firm’s Professional Indemnity (PI) insurance policy and the total amount of a third party claim. It offers far wider and more flexible protection to the partners, members or directors than additional excess layer PI insurance on its own.

“It offers a ring-fenced financial reserve, which can be called upon to meet a number of potential costs and financial exposures if the PI insurance limit is insufficient to meet a devastating catastrophe claim,” saysPerkins Slade an insurance company.

You may be asking yourself, “Well, Jeffrey Lipton what are the limitations to API™?”

While API™ is broad and offers excellent protection, it is imperative to know how it works in order to benefit fully.Firstly, creating an Asset Protection Strategy will offer little or no protection against those litigious or creditor situations whereby the event causing the problem happened prior to the setting up of the Strategy.

Only future-oriented protection can be achieved.

Secondly, an iron clad Asset Protection Strategy will not offer enhanced taxation benefits and will likely be, at best, tax neutral in most cases. Although some benefits may accrue to future assets, they are best ensconced in a legal tax deferral scenario.

One of the most important aspects of a successful Asset Protection Strategy is to ensure that the structure itself is transparent. The most effective way to accomplish this besides asset protection is to insure that the assets pass irrevocably as they do in the case of API™.Underan API™ scenario assets legally change title and vest in a licensed, registered, and accountable fiduciary (i.e. the trustee) for the use of the beneficiaries.

By making the asset protection irrevocable and not a structure for tax purposes, all of the elements are declared and the client can then have the ability to use the law to in fact protect the asset. The API™ can then withstand the scrutiny and the test of time by being a program that accomplishes these goals for several generations to come.

Who needs API™?Any one who needs to protect themselves from economic predators, be they shareholders, clients, investors, friends or even family. An API™ strategy is imperative for businesses that carry the potential for litigation. These are the normal at risk businessman, professionals (i.e. doctors) and others who are either in a risk profession or have assets that need succession planning help.

A strong API™ strategy can protect assets and businesses that have been built over a lifetime and can give business owners and executives a deeper level of protection, thus resulting in peace of mind.

Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.

Right now it’s no secret that selling merchandise to Americans is pretty lucrative. We also know that it hasn’t always been this way. A relative of mine who sells lighting products to customers the U.S. is a case in point.

My brother-in-law built a very successful business with his wife from the ground up. Their decision to sell to markets in the US worked fine, but the real boost to sales occurred when their son joined the business and talked them into selling on the Internet. Online sales boomed, but of course so did their company’s vulnerability to exchange rate risk.

A few years ago, he was struggling to make his usual margins (which are not that big at the best of times) when the CAD/USD exchange rate approached par. In other words, a C$ was pretty much equal to the US$. Cross-border shoppers from the Canadian side of the border were in heaven (myself included), whereas exporters were beginning to panic. After all, their costs were still in Canadian dollars, which was an advantage when they received sales revenue in a much stronger $US. Converting back into Canadian currency provided a substantial bonus to their profits and quality of life.

Things are great once again, but how can a smaller business owner(s) plan ahead to make sure that currency risk doesn’t threaten their livelihood?

The graph below illustrates the impact currency can have on a business. Imagine a fictional Canadian company that began selling a specialty cheese to the U.S. marketplace in June of 2006. The sale price stays the same (due to competitive pressures) at US$ 2.50. Costs are steady in C$ 1.98 range. Sales made in US dollars must be converted back to Canadian dollars. It is easy to see how just the exchange rate can wreak havoc on a businesses revenues and profitability. Is it possible to anticipate or prevent this volatility? When companies are accustomed to very large orders, it is possible to contact your bank and make arrangements to use the currency forward markets in order to ‘hedge’ your profits. For instance, if one expects to have to convert a significant amount of foreign currency into one’s domestic currency once the order is delivered, you can arrange to lock in the forward exchange rate today, thereby knowing exactly what your margin is (and will be).

However, the orders for most small businesses aren’t large enough to make hedging a viable option. Can you plan for currency fluctuations? Experts agree that there is no robust way to forecast exchange rates. Experts have been frustrated trying to predict exchange rates for years, and the forward markets/futures markets are not very good predictors of the exchange rate that will actually occur in 3 to six months.

One approach that has been around (seems like forever) is the purchasing power parity theory. The price of a consumer product (same materials, can be sourced locally or at same prices) should be the same in different countries, once adjusting for the exchange rate. Below, the table compares the price of the rather ubiquitous iPhone in Canada, Europe and Asia. The price of the iPhone 6s 16GB (unlocked) in the U.S. is about $699, and should be more or less the same in Nanjing, China (their currency (is the remninbi or RMB) adjusting for the exchange rate as it is in Berlin Germany (euros). As you can see from the table, this is not the case (the prices and exchange rates are not 100% accurate due to rounding).

Because Germans and the Chinese have to pay an even bigger price, it suggests the the USD is overvalued relative to those currencies. The Canadian dollar on the other hand, based on this overly simple approach is actually still a bit overvalued compared to our neighbour to the south even at these depressed levels. Of course, our proximity to the US might simply give Canadians a great deal on iPhones not available in other countries.

We should therefore expect the USD to depreciate relative to both the EUR and RMB in due course – the forces of supply and demand (for products, services and therefore currencies) should cause disparate prices to equilibrate. The mobile device in theory should cost the same to the consumer no matter where he/she lives. Should the USD decline significantly (perhaps even compared to the Canadian dollar) then the margin on good and services businesses in those countries are earning today with decline.

The problem, is that historically purchasing power parity is also a poor predictor of exchange rates. The game of international finance is extremely complex. Not only are exchange rates determined by differing interest rates in countries, balance of payments, trade balance, inflation rates and perceived country risks, the rates are also influenced by expectations associated with these variables and more. The bottom line for smaller businesses is that when it comes to foreign exchange risk – they are completely exposed.

So what can be done? Planning. It is tempting to become overly optimistic when exchange rates have drifted in your favour, encouraging further investment to facilitate more sales in the stronger currency. Buying equipment, hiring permanent labour and leasing more space introduces higher fixed costs that might dampen or destroy profitability when the tide turns the other way. It is important to consider ‘what if’ scenarios frequently – and especially before laying out more capital. For entrepreneurs the biggest mistake is to take for granted that the status quo will continue. All of a sudden, you might be buying yourself a bigger house, a fancier car and sending the kids to private school – all based on current income which is linked to the current prosperity of your business.

Currency instability is a fact of life, and the best way to be prepared is to expect the inevitable. Rather than rush to spend more on expanding the business put aside a ‘safety’ cushion during good times that can be drawn upon during bad times. If your commitment to the US, European or other markets is firm, then park the cushion into currencies you are vulnerable too. For example, invest your cushion in US dollar denominated assets – U.S. Treasury bills will provide a natural hedge for your sales. Similarly, if a significant volume of your sales are in Europe and the company borrows funds for operations, borrow some funds in euros as a hedge – then if the euro appreciates you’re able to pay those obligations in the same stronger currency thanks you your euro receivables.

It is widely believed today that the USD is likely to depreciate relative to a number of other currencies, and perhaps imminently. Today might indeed be the ideal time to begin considering ‘what if’ scenarios and the actions you can take to plan ahead.

]]>On the investment front linehttp://money.ca/you_and_your_money/2015/08/31/on-the-investment-front-line/
Mon, 31 Aug 2015 14:00:12 +0000http://money.ca/you_and_your_money/?p=5330“When people talk about cash being King, it’s not King if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of the other times when it buys a fair amount more, so we use it,” – Howard Warren Buffet

It’s been a tough week in the stock market where we’ve seen the S&P / TSX Composite Index (^GSPTSE) drop over 1,000 points from 14,193.90 on August 18th to 13,150.90 on August 25th – that’s a decline of 7.35%.

I thought I’d share a few personal thoughts on volatility, holding cash and investing.

Volatility to the downside can be tough to swallow. If it bothers you a lot, it may be that you had too much in the stock market in the first place. A little less and you might instead be rubbing your hands together with excitement as opportunity may have finally emerged to bargain hunt. Determining the right balance between stocks and bonds/cash is key. On average, it is my experience that the stock market is flat to up about 60% of the time. So for people that are extremely light on equities, they tend to underperform. Similarly, those that have a high percentage in equities tend to be stuck when the market goes down. During stock market declines, having too much in stocks is really stressful. You can lose perspective and make an emotional decision to sell to preserve what remains of your life savings. Selling stocks and moving to cash/bonds can make losses permanent and be hard to ever recover from. So you should really do some serious thinking about real fluctuations in your portfolio value to decide how much to have in equities and the type of equities.

Cash is a depreciating asset – it should be used for meeting your living needs or to keep temporarily when being opportunistic. If inflation is 2.5% today, that means a year from now it costs you $102.50 to buy on average a basket of goods that cost you $100.00 a year ago. Too much cash can be a big drag on your overall portfolio total return. Better to figure out your cash needs for the next few years plus a fund for unanticipated emergency expenses that is invested conservatively in a money market fund or, if you take a bit of risk, a short term bond fund. Those funds you leave alone. They help you to be able to be a long term investor and keep your cool when the market cools. Not having enough income or cash to last you through a market downturn without having to liquidate stocks at a substantial loss is simply insane. Those liquidations can make those portfolio value losses permanent which you may never be able to recover from.

For opportunistic investing, figure out what percent of your portfolio you would be willing to put back into stocks on a downturn. That percentage amount is what you need to raise at the end of the strong seasonal period of the market. It could be say 10% of your portfolio value.

If you are retired and need to draw on your portfolio for living needs, think of a stock that doesn’t pay a dividend as being required to be subsidized by income from other investments or through eating some of your capital.

Growth stocks can have high sexy returns, but they can have a higher level of volatility than income investments. Where you are retired and draw on your portfolio, you may very well be better off with a lower return income portfolio than one full of growthy higher return and higher risk stocks. (Do some research on terminal wealth funding and learn about importance of risk-adjusted returns).

The best return prospects and arguably the lower risk investments for me have been those stocks you pick up on a fantastic sale. It could happen because of an overall market correction, industry correction or investment correction (but only if its long term earning prospects aren’t impaired).

There are some seasonal patterns that can give you conviction to lighten up from your equity target or to be over your target. The summer months from May to end of first week of October tend to be the low returns period and the 2nd week of October to end of April being the stronger period. Caution: Don’t stray too far from your equity target – it can leave you overly exposed or you can miss out on returns.

To make money in investing, you need to consider an investment’s risk and potential return. Return can be broken into its predictable periodic income stream (dividends or interest) and the gain or loss on selling. Income can be considered a “safer return”. It tends to be more predictable. The gain or loss is influenced not only with how undervalued an investment is, but also human nature that usually pushes an investment price above or below its fundamental value. That unfortunately can make the gain or loss on sale unpredictable. If it were not the case, investing would be a piece of cake and I’d need to find another job.

The idea of buying and holding is inferior to sticking to your equity target. The reason why is that markets are volatile and you can make more in returns and reduce risk by buying low (adding to stocks when equities drop and your percentage is lower than your target, so you top up to your target) and selling high (the reverse process when your stocks as a percentage is higher than your target so you sell down to your target).

There is no reason why any one type of investment should always do better than another investment. Every investment type will have their time in the sun. It is best to have many different types of investments so that you can always be in a position to sell something expensive (“selling high”) to buy something that is beaten down (“buying low”). That is the mantra of diversification.

If you are selecting stocks using a strategy, don’t forget the more stocks you select, the more likely you will experience the strategy returns. This is a probability concept on sampling size. I have found that this concept usually holds true. It is why I don’t like buying less than 20 stocks but prefer to buy even more (ideally 25 – 50 depending on commissions and amount of cash to allocate to stocks).

It doesn’t matter how you feel about the prospects on any one stock. Anything can happen to it. Even if you think it is really undervalued, human behaviour can continue to push it down lower than what you might ever think possible. It is why I limit how much I might put into any one investment. On this I have been humbled on more than one occasion.

Lastly, don’t be full of yourself if you select stocks and they go up in value. It could be simply luck or that the stock market wave has lifted up all stocks and pulled your picks along with it. If you are not considering both risk and return where risk is managed in terms of: company risk, industry risk, strategy risk (do the attributes you screen for are logical in leading to returns, statistically significant and proven to work through time), and asset mix (the mixture of stocks, bonds and cash), you shouldn’t be picking individual stocks. Stick with diversified mutual funds and ETFs.

]]>Index and Sector ETFs: Mutual Funds: Speculation X3http://money.ca/you_and_your_money/2015/08/20/index-sector-etfs-mutual-funds-speculation-x3/
Thu, 20 Aug 2015 12:25:23 +0000http://money.ca/you_and_your_money/?p=5313How many of you remember the immortal words of P. T. Barnum? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a greed-driven rush to financial disaster.

The dot.com meltdown spawned index mutual funds, and their dismal failure gave life to “enhanced” index funds, a wide variety of speculative hedge funds, and a rapidly growing assortment of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs.

How far will we allow Wall Street to move us away from the basic building blocks of investing? Whatever happened to stocks and bonds? The Investment Gods are appalled.

A market or sector index is a statistical measuring device that tracks prices in securities selected to represent a portion of the overall market. ETF creators:

select a sampling of the market that they expect to be representative of the whole,

purchase the securities, and then

issue the ishares, SPDRS, CUBEs, etc. that speculators then trade on the exchanges just like equities.

Unlike ordinary index funds, ETF shares are not handled directly by the fund. As a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the index they were selected to track. Confused? There’s more — these things are designed for manipulation.

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund.

These activities create artificial demand in an attempt to minimize the gap between NAV and market price. Clearly, arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low — and why there are now thousands of the things to choose from.

Two other ETF idiosyncrasies need to be appreciated:

a) performance return statistics for index funds may not include expenses, but it should be obvious that none will ever outperform their market, and

b) index funds may publish P/E numbers that only include the profitable companies in the portfolio.

So, in addition to the normal risks associated with investing, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies.

We then call this hodge-podge of speculation a diversified, passively managed, inexpensive approach to Modern Asset Management — based solely on the mathematical hocus pocus of Modern Portfolio Theory (MPT).

Once upon a time, but not so long ago, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their diversification. Does diversified junk become un-junk? Isn’t passive management as much of an oxymoron as variable annuity? Who are they kidding?

But let’s not dwell upon the three or more levels of speculation that are the very foundation of all index and sector funds. Let’s move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management.

Mutual Funds were a monumental breakthrough that changed the investment world. Hands-on investing became possible for everyone. Self-directed retirement programs and cheap to administer employee benefit programs became doable.

The investment markets, once the domain of the wealthy, became the savings accounts of choice for the employed masses — because the “separate accounts” were both trusteed and professionally managed. When security self-direction came along, professional management was gone forever. Mutual fund management was delegated to the financially uneducated masses.

ETFs are not the antidote for the mob-managed & dismal long term performance of open end Mutual Funds, where professionals are always forced to sell low and to buy high. ETFs are the vehicles of choice for Wall Street to ram MPT mumbo jumbo down the throats of busy, inexperienced investors… and the regulators who love them because they are cheap.

Mutual fund performance is bad (long term, again) because managers have to do what the mob tells them to do — so Wall Street sells “passive products” with controlled content that they can manipulate more cheaply.

Here’s a thumbnail sketch of how well passive ETFs may have performed from the turn of the century through 2013: the DJIA growth rate was about 0% per year, the S & P 500 was negative; the NASDAQ Composite has just recently regained its 2000 value.

How many positive sectors, technologies, commodities, or capitalization categories could there have been?

Now subtract the fees… hmmmm. Again, how would those ETFs have fared? Hey, when you buy cheap and easy, it’s usually worth it. Now if you want performance, I suggest you try real management, as opposed to Mutual Fund management… but you need to take the time to understand the process.

If you can’t understand or accept the strategy, don’t hire the manager. Mutual Funds and ETFs cannot “beat the market” (not a well thought out investment objective anyway) because both are effectively managed by investor/speculators… not by professionals.

Sure, you might find some temporary smiles in your ETFs, but only if you take your profits will the smiles last. There may be times when it makes sense to use these products to hedge against a specific risk. But stop kidding yourself every time Wall Street comes up with a new short cut to investment success.

There is no reason why all of you can’t either run your own investment portfolio, or instruct someone as to how you want it done. Every guess, every estimate, every hedge, every sector bet, and every shortcut increases portfolio risk.

Products and gimmicks are never the answer. ETFs, a combination of the two, don’t even address the question properly — AND their rising popularity has raised the risk level throughout the Stock Market. How’s that, you ask?

The demand for the individual stocks included in ETFs is raising their prices without having anything to do with company fundamentals.

What’s in your portfolio?

How will ETFs and Mutual Funds fare in the next correction?

Are YOU ready.

]]>Brave Old World: Market Cycle Investment Managementhttp://money.ca/you_and_your_money/2015/07/14/brave-old-world-market-cycle-investment-management/
Tue, 14 Jul 2015 16:55:01 +0000http://money.ca/you_and_your_money/?p=5277The Market Cycle Investment Management (MCIM) methodology is the sum of all the strategies, procedures, controls, and guidelines explained and illustrated in the “The Brainwashing of the American Investor” — the Greatest Investment Story Never Told.

Most investors, and many investment professionals, choose their securities, run their portfolios, and base their decisions on the emotional energy they pick up on the Internet, in media sound bytes, and through the product offerings of Wall Street institutions. They move cyclically from fear to greed and back again, most often gyrating in precisely the wrong direction, at or near precisely the wrong time.

MCIM combines risk minimization, asset allocation, equity trading, investment grade value stock investing, and “base income” generation in an environment which recognizes and embraces the reality of cycles. It attempts to take advantage of both “fear and greed” decision-making by others, using a disciplined, patient, and common sense process.

This methodology thrives on the cyclical nature of markets, interest rates, and economies — and the political, social, and natural events that trigger changes in cyclical direction. Little weight is given to the short-term movement of market indices and averages, or to the idea that the calendar year is the playing field for the investment “game”.

Interestingly, the cycles themselves prove the irrelevance of calendar year analysis, and a little extra volatility throws Modern Portfolio Theory into a tailspin. No market index or average can reflect the content of YOUR unique portfolio of securities.

The MCIM methodology is not a market timing device, but its disciplines will force managers to add equities during corrections and to take profits enthusiastically during rallies. As a natural (and planned) affect, equity bucket “smart cash” levelswill increase during upward cycles, and decrease as buying opportunities increase during downward cycles.

MCIM managers make no attempt to pick market bottoms or tops, and strict rules apply to both buying and selling disciplines.

Managing an MCIM portfolio requires disciplined attention to rules that minimize the risks of investing. Stocks are selected from a universe of Investment Grade Value Stocks… under 400 that are mostly large cap, multi-national, profitable, dividend paying, NYSE companies.

No open end Mutual Funds, index derivatives, hedge funds, or futures betting mechanisms are allowed inside any MCIM portfolio.

All securities must generate regular income to qualify, and no security is ever permitted to become too large of a holding. Diversification is a major concern on an industry, or sector, level, but global diversification is a given with IGVSI companies.

Risk Minimization, The Essence of Market Cycle Investment Management

Risk is compounded by ignorance, multiplied by gimmickry, and exacerbated by emotion. It is halved with education, ameliorated with cost-based asset allocation, and managed with disciplined: selection quality, diversification, and income rules— The QDI. (Read that again… often.)

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires daily decision-making. Risk management requires security selection from a universe of securities that meet a known set of qualitative standards.

It keeps poor diversification from creeping into your portfolio and eliminates unproductive assets in a rational manner.

]]>Strategic Investment Mixology – Creating The Holy Grail Cocktailhttp://money.ca/you_and_your_money/2015/07/11/strategic-investment-mixology-creating-the-holy-grail-cocktail/
Sat, 11 Jul 2015 17:23:21 +0000http://money.ca/you_and_your_money/?p=5226So what do your Investment Manager and your neighborhood bartender have in common, other than the probability that you spend more time with the latter during market corrections?

Antoine Tedesco, in his “The History of Cocktails“, lists three things that mixologists consider important to understand when making a cocktail: 1) the base spirit, which gives the drink its main flavor; 2) the mixer or modifier, which blends well with the main spirit but does not overpower it; and 3) the flavoring, which brings it all together.

Similarly, your Investment Manager needs to: 1) put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making; 2) use a well defined and consistent investment methodology that fits well with the plan without leading it in tangential directions; and 3) exercise experienced judgment in the day-to-day decision making that brings the whole thing together and makes it grow.

Tedesco explains that: new cocktails are the result of experimentation and curiosity; they reflect the moods of society; and they change rapidly as both bartenders and their customers seek out new and different concoctions to popularize. The popularity of most newbies is fleeting; the reign of the old stalwarts is history — with the exception, perhaps, of “Goat’s Delight” and “Hoptoad”. But, rest assured, the “Old Tom Martini” is here to stay!

It’s likely that many of the products, derivatives, funds, and fairy tales that emanate from Modern Portfolio Theory (MPT) were thrown together over “ti many martunies” at Bobby Van’s or Cipriani’s, and just like alcohol, the addictive products created in lower Manhattan have led many a Hummer load of speculators down the Holland tubes.

The financial products of the day are themselves, created by the mood of society. The “Wizards” experiment tirelessly; the customers’ search for the Holy Grail cocktail is never ending. Curiosity kills too many retirement “cats”.

Investment portfolio mixology doesn’t take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment cocktail together without the risk of addictive speculations, or bad after- tastes, is a valuable talent worth finding or developing for yourself. The starting point should be a trip to portfolio-tending school, where the following courses of study are included in the Investment Mixology Program:

Understanding Investment Securities: Investment securities can be divided into two major classes that make the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate profits in the form of capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, royalties, rents, etc.

All investment securities involve both financial and market risk, but risk can be minimized with appropriate diversification disciplines and sensible selection criteria. Still, regardless of your skills in selection and diversification, all securities will fluctuate in market price and should be expected to do so with semi-predictable, cyclical regularity.

Planning Securities Decisions: There are three basic decision processes that require guideline development and procedural disciplines: what to buy and when; when to sell and what; and what to hold on to and why.

Market Cycle Investment Management:Most portfolio market values are influenced by the semi-predictable movements of several inter-related cycles: interest rates, the IGVSI, the US economy, and the world economy. The cycles themselves will be influenced by Mother Nature, politics, and other short-term concerns and disruptions.

Performance Evaluation: Historically, Peak-to-Peak analysiswas most popular for judging the performance of individual and mutual fund growth in market value because it could be separately applied to the long-term cyclical movement of both classes of investment security. More recently, short-term fluctuations in the DJIA and S & P 500 are being used as performance benchmarks to fan the emotional fear and greed of most market participants.

Information Filtering: It’s important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced manager’s skill set. There is too much information out there, mostly self-motivated, to deal with in the time allowed.

Wall Street investment mixologists promote a cocktail that has broad popular appeal but which typically creates an unpleasant aftertaste in the form of bursting bubbles, market crashes, and shareholder lawsuits. Many of the most creative financial nightclubs have been fined by regulators and beaten up by angry mobs with terminal pocketbook cramps.

The problem is that mass produced concoctions include mixers that overwhelm and obscure the base spirits of the investment portfolio: quality, diversification, and income.

There are four conceptual ingredients that you need to siphon out of your investment cocktail, and one that must be replaced with something less “modern-portfolio-theoryesque”:

1) Considering market value alone when analyzing performance ignores the cyclical nature of the securities markets and the world economy.

2) Using indices and averages as benchmarks for evaluating your performance ignores both the asset allocation of your portfolio and the purpose of the securities you’ve selected.

3) Using the calendar year as a measuring device reduces the investment process to short-term speculation, ignores financial cycles, increases emotional volatility in markets, and guarantees that you will be unhappy with whatever strategy or methodology you employ —most of the time.

4) Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually causes hair loss and shortness of breath.

]]>Stock Market Corrections Are Beautiful… Whenhttp://money.ca/you_and_your_money/2015/07/08/stock-market-corrections-are-beautiful-when/
Wed, 08 Jul 2015 12:33:24 +0000http://money.ca/you_and_your_money/?p=5224A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if any brief little market hiccup becomes considerably more serious, new investment opportunities will become abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price— Investment Grade Value Stocks. I start shopping at 20% below the 52-week high water mark— the bargain bins are filling.

3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

4. Take a look at the future. Nope, you can’t tell when the rally will resume or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time— as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin’ their heads.

5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye, and if you are doing it properly, you’ll run out of cash well before the new rally begins.

6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed(look it up). You should be out of cash while the market is still correcting— it gets less scary each time. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago—

9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it is based upon your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed portfolio.

Unfortunately, only Self Directed 401k and IRA programs are able to use Market Cycle Investment Management.

10. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don’t have the courage to get rid of them during rallies— also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Short ones (those that last a few days, weeks, or months) are nearly impossible to deal with using Mutual Funds.

So if you overthink the environment or overcook the research, you’ll miss the party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight.

Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction—